BUS102 Economics Assignment: Taxation Impact on Energy Market

This report provides an economic analysis of the energy market on the fictional island of 'Experimentia', focusing on the consequences of introducing a tax on energy consumption. Initially, the market operates without regulations, resulting in pollution from energy providers. The government propos...Read More

Running head: ECONOMICS 1
Economic Analysis of Energy market
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Economic Analysis of Energy market
The law of demand and supply
The law of demand states that "Ceteris Paribus, the demand of commodity increases
with the decrease in price and is lower with the increase in prices of the
commodities"(Chendroyaperumal, 2010). The law of supply states that "The quantity
supplied of the given commodity increases with the increase in price and decreases with the
decrease in price of the commodity causes the quantity supplied to reduce”. These law were
applied to the product purchase.
The demand curve showing the demand of the commodity
Demand of energy commodities before taxation and regulations
Price elastic demand of commodity
Since there are no regulations within the market, even though when the demand of the
commodity is elastic, the quantity of energy commodities that are available in the market
(supply) is high before taxation, this is because there is an increasing number of people who

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are willing and able to purchase these commodities (demand). The availability of the willing
population is caused by the low prices and these prices are set because of the existing
government policy of taxation on energy products (Reed, 2016).
The increase in the demand of the product because of the lower prices will cause a
shift in supply so as to cause equilibrium. Therefore, before taxation both demand and supply
of the energy product were high and the prices where low.
Price inelastic demand of commodity
Price elasticity of demand is referred to as the ratio of percentage change in the
quantity demanded of a given commodity to the percentage change in the price of a given
commodity. The formula for evaluating the price elasticity coefficient for demand of a given
commodity is given by;
where Q is the quantity demanded of the commodity and P is the
price of the commodity.The formulae of elasticity of demand always give a negative yield
because of the inverse proportionality of relationship between quantity demanded and price
of the commodity (Sabatelli, 2016).
Price inelasticity of demand refers to a condition where a change in price of the
commodity doesnot greately affect the quantity demanded of the same commodity.
Given the fact that the demand of energy products is inelastic, the quantity demanded
will not reduce given the fact that there is a price increase. This is because of their purpose in
daily life where different individuals cannot do without them.
The graph showing price inelasticity of the commodity

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Besides price, there are also other factors which affect the demand of energy products
within "Experimental". Some of these include; disposable income, consumer tastes and
preferences, and other factors. Considering the disposable income, it’s most likely to
influence the demand of commodities before the government introduces its taxes to influence
the price. Increase in the disposable income of consumers within the island, it will definitely
cause an increase in demand of the energy products. The price and presence of other goods
(substitutes) also definitely affected the demand of energy commodities before government
policy of taxation. There are no immediate substitutes for the energy commodities making the
demand of the commodities inelastic whereby a slight fall in prices would not cause a big
change in the quantity demanded of the commodity. Lifestyles, demographic variables,
personal preferences, as well as weather conditions are some of the other factors that affected
demand of energy. In climates that are cold, more of energy sources are demanded since
energy is needed for heating and warming, in hot conditions also electricity is demanded for
air conditioning. Given the fact that these factors are very necessary in determining the
demand of energy, the price is much more crucial.

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Demand of energy commodities after taxation and government regulations
The tax imposed on the commodities will greatly affect its demand and supply. The
taxes will reduce supply and demand of energy commodities, the market equilibrium after the
tax will be driven to a higher price than before levying the tax and the quantity demanded
will reduce as compared before levying the tax.
Tax incidence
Tax incidence refers to the way how the tax burden could be shared among the
different market participants, in other wards it refers to "who will bear the tax burden among
the different participants". The main reason why Tax authorities imposes taxes is to make
sure either the seller or the buyer is legally responsible for the tax payments on supplied
goods and services within the given territory (Blodget, 2012).
The responsibility of the tax depends on the elasticity of demand of the product;
Price elastic demand of the product
If the product demand is elastic, the seller will definitely hold the tax burden thus
making less profits and revenue. Imposing the tax on energy products will definitely cause a
fall in its demand due to the increase in prices since the supplier will like to transfer the
burden to the consumers (LEONHARDT, 2012).Reduction in demand of the commodity will
cause a decrease in the supply of the energy products.
The graph below shows the reduction in quantity supplied of the commodity because
of an increase in the price. It also illustrates the how the supply curve shifted inwards after
the price increased.

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The demand of the commodity will reduce because of increase in prices and this is the reason
as to why also the supply of the commodities will be affected.
For that case, government interference by imposing taxes on the demand and supply of
energy commodities will cause the responsible companies to make less revenue due to the
reduced demand. It will also be useful in avoiding pollution as it was needed by the
government.
Therefore on that note, imposing the tax on the energy commodities. It causes a shift
in supply curve to inward, it also affect the equilibrium product price (Wall, 2008). The
equilibrium price is referred to that price where the supply of consumers matches the demand
at stable prices. This will greatly affect the supply since consumers are demanding less
because of increasing price of the commodities.
Price inelastic demand of the product

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When the demand of the commodity is inelastic, the tax burden is transferred onto the
consumers. Energy products are greatly demanded by the people, this makes the demand of
these commodities inelastic since one cannot do away with them (Brownell et al, 2009). The
government levied tax to reduce on its demand so as to reduce pollution within the country.
Since the commodity's demand is inelastic, the tax burden will be transferred onto the
consumers thus their demand will decrease due to increase in prices of the commodity.
The graph below shows the supply and demand shift of the energy products after and before
imposing the tax.
Triangle ABC represents dead weight loss because of taxation, this occurs because of
the fewer beneficial exchanges that lie between the sellers and buyers (De Rassenfosse &
Pottelsberghe, 2012). The loss of deadweight stems from existence of foregone economic
activities, it is a loss which does not cause offsetting gain for the other participants involved
in the market. It causes a permanent decrease in producer or consumer surplus.

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References
Blodget, H.(2012). "BOMBSHELL: New Study Destroys Theory That Tax Cuts Spur
Growth". Www.businessinsider.com. Business Insider,
Inc.http://www.businessinsider.com/study-tax-cuts-dont-lead-to-growth-2012-9
Brownell, Kelly D.; Farley, Thomas; Willett, Walter C.; Popkin, Barry M.; Chaloupka, Frank
J.; Thompson, Joseph W.; Ludwig, David S. (2009). "The Public Health and
Economic Benefits of Taxing Sugar-Sweetened Beverages". New England Journal of
Medicine. 361 (16): 1599–1605. doi:10.1056/NEJMhpr0905723. PMC 3140416.
PMID 19759377.http://content.nejm.org/cgi/content/full/NEJMhpr0905723
C Chendroyaperumal.(2010). The First Laws in Economics and Indian Economic Thought –
Thirukkural,https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1545247
De Rassenfosse, G.; van Pottelsberghe, B. (2012). "On the price elasticity of demand for
patents". Oxford Bulletin of Economics and Statistics. 74 (1): 58–77.
doi:10.1111/j.1468-0084.2011.00638.x. Working paper on
RePEc,http://www.gder.info/paper_On_the_price_elasticity_of_demand_for_patents.
html
LEONHARDT, D. (2012). "Do Tax Cuts Lead to Economic Growth?”Nytimes.com. the New
York Times Company.https://www.nytimes.com/2012/09/16/opinion/sunday/do-tax-
cuts-lead-to-economic-growth.html
Reed, J. (2016). "AP Microeconomics Review: Elasticity Coefficients". APEconReview.com.
Retrieved 2016-05-27,http://www.apeconreview.com/elasticity-coefficients.html
Sabatelli, L. (2016). "Relationship between the Uncompensated Price Elasticity and the
Income Elasticity of Demand under Conditions of Additive Preferences". PLOS ONE.

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11 (3): e0151390. doi:10.1371/journal.pone.0151390. ISSN 1932-6203. PMC
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Prentice Hall. ISBN 978-0-273-71367-8. Retrieved 6 March
2010.https://books.google.com/books? Id=TrRtUr_Wn2IC